Ongoing growth in on-line UPS/EV charging pile segments. Kstar reported slightly weaker 1Q17 operating results, due to higher R&Dinvestment in the EV charging pile and inverter businesses. It is upbeat on onlineUPS (double digit)/EV charging (100+% YoY) demand, stimulated by robustdata center set-up/government EV promotion policies. The company views2017 as a back-end-loaded year, with 20-50% YoY revenue growth guidance in2H17 to be driven by 1) 10+kVA on-line UPS strength, 2) strong inverterrevenue growth on the government’s poverty reduction project wins, and 3) apotential EV project win from States Power. We like Kstar’s secular industrygrowth trend and solid balance sheet, and reiterate our Buy rating. Weaker 1Q17 operating profit due to higher R&D investment. Kstar reported 1Q17 earnings of RMB50mn (+2% YoY, -55% QoQ) on revenue ofRMB4bn (+18% YoY, -31% QoQ). Despite a raw material price hike (the leadprice increased 5+% in 1Q17), GPM of 34.5% was roughly in line with our andconsensus estimates, thanks to a favorable product mix change (on-line UPSoutgrew off-line UPS). However, due to higher sales promotion/R&D input for theinverter and EV charging pile businesses, operating profit of RMB60mn (+12%YoY, -25% QoQ) came in 3% lower than our and Bloomberg consensus forecasts. Targeting 20-50% YoY top-line growth in 2H17 on EV/inverter strength. Kstar described the recent opex hike as an essential investment under itspersistent market share expansion plan for the EV charging and inverter fields. Foreseeing strong EV charging demand, Kstar raised 2017 EV chargingrevenue guidance from 50-80% YoY to 100+% YoY, driven by its persistentnew EV/E-bus charging order wins in Zhejiang, Jiangsu and Gansu provinces. For UPS, Kstar also anticipates continuing margin expansion from the current38-40% level, propelled by sequential order wins from data center customers. Management states that a recent raw material price correction could help easemarket concern and boost faster UPS profit growth from 2Q17 onward. Valuation and risks. We trim our 2017 EPS estimate by 10% to factor in higher opex, and lower ourtarget price from RMB27 to RMB24, still based on 30x one-year FW-lookingEPS, or 1.0x PEG, in line with Asian peers of 20-30x P/E, or 1.0x PEG. Risksinclude slower EV adoption and price competition.

Riding on the data center and China EV proliferation trend. Kstar released preliminary 4Q16 results with better operating profit which beatour and consensus forecasts by 5%. By offering premium/modularized UPS todata center customers, Kstar delivers persistent margin growth in UPSsegment which mitigates cost pressure stemming from raw material price hike. In 2017, Kstar is comfortable to deliver 25-30% YoY EPS increase due to EVand UPS momentum. Besides sequential orders win from more EV operators indifferent provinces, Kstar is also dealing with States Grid (leading gridoperators in China owned by the government) now and will try to bid EVcharging pile orders this year. Management indicates that any faster taking offin State Grid order will post additional upside to its current earnings forecast. We like Kstar’s promising growth outlook and solid balance sheet (net cash,positive FCF), reiterating Buy rating. 4Q16 operating result beat our expectation on modularized UPS strength. Kstar reported preliminary 4Q16 earnings of of RMB109mn (+16% YoY, +54%QoQ) on sales of RMB585mn (+10% YoY, +41% QoQ). Operating profit ofRMB102mn (+24% YoY, +23% QoQ) was 5% ahead of our optimistic estimatethanks to integrated UPS and inverter (States Power and CGN Power orders)strength. Despite rising raw material cost resulting from lead acid battery pricehike (lead price lifted 5-10% in 4Q16), Kstar’s GPM still sustained at ~39%thanks to rising profit contribution from premium integrated UPS orders. Kstarintegrates on-line UPS, high precision air conditioner and power managementsystem into a cabinet, which helps enhance user experience and ensure itscompetence over competitors. Optimistic 1Q17 and 2017 outlook. Kstar is upbeat on three of its major businesses (UPS, inverter, EV chargingpile) and targets to deliver 25-30% YoY EPS growth in 2017. The company haswon new inverter orders from Shandong government’s poverty reductionprogram starting January, which will mitigate slow seasonality in 1Q17. Foreseeing strong premium/high power UPS orders gain from Baidu andAlibaba, we expect Kstar’s on-line UPS GPM to ramp to 46% in 2017 vs. 43% in2016. For EV charging pile, Kstar is expanding its territory from Zhejiang andJiangsu provinces to Gansu with shipment staring 1Q17. Management guidesfor a 50-80% YoY EV revenue growth this year propelled by 1) accelerating EVproliferation in China, and 2) it’s enhanced partnership with more operators indifferent provinces. Valuation and Risk. We fine-tune our earnings model but leave our 2017 EPS estimate largelyunchanged. Our TP of RMB27 is still based on 30x 2017E P/E, or 1.0x PEG, inline with Asian peers of 20-30x P/E, or 1.0x PEG. This valuation is justified bystrong sector outlook. Risks include slower EV adoption and price competition.

Intact growth outlook in 2017; reiterating Buy Despite the high base (100%+ EPS growth in 2015/2016), we expect Sunwayto carry on strong EPS growth momentum in coming years, driven by marketshares in i-device and Android handset antenna and the successful penetrationinto new business (EMI shield, wireless charging module, etc). In i-device, weanticipate growth to come from EMI shield share gain and rising contributionfrom high-ASP Mac antenna. In Android camp, we forecast growth to comefrom Samsung (wireless charging) and the new Nokia. Retaining Buy rating. Ongoing i-device market share expansion In the core business (iPhone Wi-Fi/BT/GPS antenna), we expect Sunway tokeep gaining market share from 40%+ in iPhone 7to 50%+ in iPhone 8.Sunway started iMac/Macbook antenna shipment in 2016with order allocationof 5-10%. Based on current visibility, Sunway believes it can grow marketshare to 20%-30% in 2017. ASP of Mac antenna is as high as USD10+ (vs sub-USD1.5for iPhone). Leveraging its high precision tooling, and stampingexpertise, Sunway penetrated into iPhone EMI shields in 4Q15with ~10%market share (key competitor is UK-based Laird). We expect Sunway to doubleits market share in 2017due to its superior cost structure (vs. global peers) andsolid execution. EMI shield is a metal case mounted onto PCBs to reduce EMI(electromagnetic interference) between components. What’s new in Android camp: Nokia orders + rising Samsung WPC orders In the Android camp, we expect growth to come from share gains inSamsung’s wireless charging module (from 10%-15% in 2016to 20%-25% in2017) and Nokia’s return to the smartphone business. The new Nokia (run by aprivate firm HMD, founded by ex-Nokia top managers) will focus on Androiddevices. Our supply chain check indicates that Nokia will launch 4-5newmodels with a shipment target of 5mn-8mn units in 2017. We expect Sunwayto be the primary supplier of antennas, jumper cables, O-clip connectors, andEMI shields for both smartphones and feature phones (annual shipment of 70-80mn units) with ASP of USD1.5-2and sub-USD0.5respectively. Valuation and investment thesis We maintain our Buy rating and raise our 2017/2018E EPS by 2%/4% to factorin further share gain in iOS and Android mobile devices. We raise our targetprice to RMB29from RMB28.4(still based on 1x PEG, in line with A-sharepeers, or 35x 2017EPS). Key risks include share losses and price competition.